From the blog: Diversified growth funds have undergone explosive growth in the past decade, and are now one of the fastest-growing areas of asset management.
The market grew by £22bn in 2013 alone, driven by their burgeoning popularity among defined benefit pension schemes – nearly half (44 per cent) of new allocations came from the DB world.
But there are signs this is just the first stage of even larger growth in the sector.
The market grew by £22bn in 2013 alone, driven by their burgeoning popularity among defined benefit pension schemes – nearly half (44 per cent) of new allocations came from the DB world.
But there are signs this is just the first stage of even larger growth in the sector.
While each DGF is diversified across various asset classes, blending together multiple funds increases the diversification of the overall DGF exposure
Market research provider Spence Johnson has predicted the market will double to £201bn over the next five years.
DGFs aim for equity-like returns through a diversified approach across multiple asset classes.
The savviest pension schemes have seen the value of using DGFs both as a growth engine and to reduce volatility.
At the heart of DC
DGFs look set to occupy the role of a core asset management strategy for small to medium schemes.
Seventy-six per cent of defined contribution schemes already include a DGF in their default strategy. What’s more, results of a survey of pension trustees and consultants last May found 58 per cent are looking to add a DGF in the future.
Source: Axa IM
The next stage of evolution in the strategic use of DGFs by pension schemes is to use more than one to enhance risk reduction.
The same survey found 57 per cent of DC schemes currently allocate to more than one DGF, and there are a number of good reasons why this approach is growing in popularity.
While each DGF is diversified across various asset classes, blending together multiple funds increases the diversification of the overall DGF exposure.
Blending also eliminates reliance on the skill or expertise of any single manager and allows access to a wider range of investment approaches.
Fund capacity is another key driver for blending. These constraints may mean pension schemes need to add an additional fund that can be blended with their existing holdings.
The growing range of DGFs available as the market expands has also led to a number of divergent styles available in different products.
One way to differentiate DGFs is by source of return. Some DGFs aim to capture the return from the market, often referred to as beta, while others might aim to deliver absolute returns independent of market movements, relying heavily on relative trades and manager alpha.
By avoiding betting on a single manager and mixing a number of different investment approaches, both DB and DC schemes can enjoy a smoother return profile, while controlling the overall fees and risk.
Yoram Lustig is UK head of multi-asset at Axa Investment Managers
